Canadian Dollar declines amid hawkish Fed outlook, US–Iran deal hopes
- USD/CAD holds positive ground near 1.4150 in Friday’s early European session.
- Growing bets that the Fed will keep interest rates elevated for longer to combat inflation underpin the US Dollar.
- Iran’s President said Tehran wants US deal before midterm elections.
The USD/CAD pair gathers strength to around 1.4150 during the early European trading hours on Friday. Mounting bets on further Federal Reserve (Fed) rate hikes provide some support to the US Dollar (USD) against the Canadian Dollar (CAD). New York Fed President John Williams and Cleveland Fed President Beth Hammack are scheduled to speak later on Friday.
Philadelphia Fed President Anna Paulson said on Thursday that additional tightening could be needed if the economy continues to evolve as expected. Meanwhile, New York Fed President John Williams also suggested tighter monetary policy is coming.
These hawkish remarks came a week after the US central bank decided to raise its benchmark interest rate by a quarter of a percentage point.
Markets are now pricing in nearly a 67.5% probability of an October benchmark rate hike, up from 55.4% a week earlier and 11% a month earlier, according to the CME FedWatch tool.
Oil prices fell slightly on Friday as markets weighed the possibility of a truce between the US and Iran against the bombing of Saudi Arabia by Houthi rebels. Iranian President Masoud Pezeshkian said on Friday that Iran wants Washington to return to the June ceasefire memorandum before the November midterm elections. It is worth noting that Canada is a major oil-exporting country, and low crude oil prices generally have a negative impact on the CAD.
Canadian Dollar steady as Gulf tensions offset by crude rebound and yield spread headwinds
Strategists at Scotiabank note that the Canadian Dollar is "little changed on the session as markets balance a clear riskoff undertone to stocks against the bounce in crude oil." They highlight that Gulf-area tensions "remain clear, despite US claims that Iran is keen to make deal," with reports indicating "one Iranian official threatened to expand the conflict to the Indian Ocean if the country was attacked again." At the same time, they point out that WTI is "4.5% above yesterday’s low," offering some support to the currency.
However, Scotiabank continues to stress that "wide US/Canada front-end spreads remain the biggest headwind for the CAD, with the 2Y spread nearing 150bps, the widest since early 2025." The strategists also flag upcoming domestic data, noting that "Canadian Retail Sales are out at 8.30ET," which could provide a fresh catalyst for USD/CAD trading.
Fed’s Paulson flags risk of further rate hikes as inflation stays stubborn
Fed’s Paulson delivers a notably hawkish message, with an FXS Speechtracker score of 8.1/10, stronger relative to the historical average of 7/10 and consistent with a firm inflation-fighting stance. The emphasis that the US central bank “may need to raise interest rates again,” that the September hike improved the policy posture, and that underlying inflation “remains stubbornly high” despite a resilient economy and stable labor market, underscores a bias toward additional tightening if data fail to show clearer disinflation. Paulson’s reference to AI buildout as a source of inflation pressures adds a structural dimension to the hawkish tone, reinforcing the risk that the policy peak may not yet be fully secure.
The FXS Fed Sentiment Index was unchanged, moving 0.00 points to a still-elevated level of 148.18, firmly in hawkish territory according to the FXS Fed Sentiment Index framework. The steady, high reading signals that Paulson’s above-baseline hawkish rhetoric is broadly in line with prevailing Fed communication tracked by the FXS Speechtracker, rather than marking a fresh hawkish escalation.
Technical Analysis: USD/CAD
In the daily chart, USD/CAD maintains a bullish near-term bias as price holds above the 100-day simple moving average (SMA) and well above the Bollinger Bands’ lower band, keeping the broader uptrend intact. However, the latest 14-day Relative Strength Index at 72.8 signals overbought conditions, hinting that upside momentum may be stretched as spot approaches the upper Bollinger band.
On the topside, immediate resistance is located at the Bollinger middle band at 1.3930 only in a corrective scenario, while the more relevant barrier is the upper Bollinger band at 1.4160, where buyers could begin to struggle. On the downside, initial support is seen at the 100-day SMA at 1.3965, ahead of a deeper structural floor at the Bollinger lower band near 1.3700, where any extended pullback would be expected to attract fresh demand.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
Canadian Dollar FAQs
The key factors driving the Canadian Dollar (CAD) are the level of interest rates set by the Bank of Canada (BoC), the price of Oil, Canada’s largest export, the health of its economy, inflation and the Trade Balance, which is the difference between the value of Canada’s exports versus its imports. Other factors include market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – with risk-on being CAD-positive. As its largest trading partner, the health of the US economy is also a key factor influencing the Canadian Dollar.
The Bank of Canada (BoC) has a significant influence on the Canadian Dollar by setting the level of interest rates that banks can lend to one another. This influences the level of interest rates for everyone. The main goal of the BoC is to maintain inflation at 1-3% by adjusting interest rates up or down. Relatively higher interest rates tend to be positive for the CAD. The Bank of Canada can also use quantitative easing and tightening to influence credit conditions, with the former CAD-negative and the latter CAD-positive.
The price of Oil is a key factor impacting the value of the Canadian Dollar. Petroleum is Canada’s biggest export, so Oil price tends to have an immediate impact on the CAD value. Generally, if Oil price rises CAD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Oil falls. Higher Oil prices also tend to result in a greater likelihood of a positive Trade Balance, which is also supportive of the CAD.
While inflation had always traditionally been thought of as a negative factor for a currency since it lowers the value of money, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Higher inflation tends to lead central banks to put up interest rates which attracts more capital inflows from global investors seeking a lucrative place to keep their money. This increases demand for the local currency, which in Canada’s case is the Canadian Dollar.
Macroeconomic data releases gauge the health of the economy and can have an impact on the Canadian Dollar. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the CAD. A strong economy is good for the Canadian Dollar. Not only does it attract more foreign investment but it may encourage the Bank of Canada to put up interest rates, leading to a stronger currency. If economic data is weak, however, the CAD is likely to fall.